Ontario Municipal Employees' Retirement System (Omers) allocates one-fifth of its C$109 billion ($83 billion) investment portfolio held to infrastructure and is eyeing more exposure to such assets in Asia, notably renewables and digital infrastructure.
Despite its very long-term, stable nature, even this asset class has been affected by the coronavirus lockdown, both positively and negatively. Transportation assets, for instance, have been hit hard as travel has been seriously curtailed, while digital infrastructure, such as data centres and telecommunications networks, have become even more crucial to daily life.
The pandemic is expected to have an ongoing and potentially permanent impact on the sector in one way or another. Speaking to AsianInvestor, Ralph Berg, Omers' London-based head of infrastructure, was more sanguine than many in his outlook.
Q. Presumably yields on infrastructure have come down in the past 10 years or so and as a result of Covid? How have you dealt with that?
RB: Generally, we expect the infrastructure that we seek to invest into to generate returns in a range between 8% and 12%.
But yields have been compressed as a result of both the abnormally low levels of interest rates in the last 10 years and have been pushed further down by the extraordinary interventions of central banks and governments in their response to the Covid outbreak.
At the same time, more capital is being allocated by institutions to infrastructure as they move away from depressed fixed income yields.
As a result, most investors either price their own expectations lower, or they increase the level of risk that they’re willing to underwrite to recover some of that compressed return.
We have tried to do a bit of both, equipping ourselves with more capabilities, more skills, more talented asset managers, to underwrite business plans that are perhaps higher-risk than we would have done five or 10 years ago.
Q. But the pandemic has presumably made doing deals more difficult?
In respect of Covid’s effect on our ability to originate, diligence, price and ultimately transact situations, there is some impact but it’s really not very meaningful.
We have continued to see lots of opportunities. We have continued to be able to select deals we felt made more sense to us. We’ve been able to work in this format, despite the limitations of not being able to gather in a room and debate things among ourselves or meet counterparties. This format has been quite efficient.
The biggest impact is on our team members tasked with originating situations – who go around the world meeting corporates, construction companies and governments to identify the next opportunity. Their work has inevitably been slowed by the pandemic lockdown.
Q. Have you done any deals physical deals during Covid that you perhaps haven’t been able to see people face to face, for instance?
We have closed things during this lockdown period that we had started on before and where we were able to do most of the work before the lockdown – like the investment into [Australian electricity network operator] TransGrid that we announced in July and the investment into [German fibre network provider] Deutsche Glasfaser that we announced in February.
But we haven’t closed anything that we’ve started under Covid – but not for lack of trying.
Q. What about the longer-term fallout from the pandemic in general?
As for the impact on long-term trends in infrastructure, I honestly think it’s too early to say. It’d be the easy answer today to say, for example, why would you want to invest in airports now, given the huge impact on the airline industry?
I don’t think anybody believes that we won’t be flying again, or we won’t be flying as much. But of course, views will differ, and that will perhaps cause a widening of the bid/ask spread and affect how people value these assets – as to whether you think normality comes back in one, three or five years.
We continue to believe in the long-term trends in infrastructure. Some were already apparent before and this crisis may have exacerbated some of that. There is a clear appetite and need for stronger, more resilient digital infrastructure; more reliable and faster broadband.
I will confess that I’m a sceptic about all the recent talk around dramatic changes in the way we work and the demise of the office. Human nature has shown that as soon as we’re able to go back to doing the things that we were doing, we want to do that. So we will continue to need roads, ports and airports.
In fact, I think the infrastructure investment class will see more opportunity as a result of the macroeconomic impact of the crisis.
The worse fiscal situations that many countries will be in as a result of the extraordinary amounts of support that governments have thrown into their economies to support the population and businesses – they will have a cost too.
Governments may need to find capital from the private sector to fund domestic infrastructure needs, whether by recycling the ownership of certain assets or by attracting capital to fund new infrastructure.